Monday, 27 February 2012

Awful, awful.....

It's a very jolly 15-minute broadcast, with jaunty music and a presenter who was obviously chosen for the fake cheeriness of her voice. I found it all rather patronising, rather like those awful radio adverts that the Child Tax Credits people produce from time to time - you know, the ones that make thinly-veiled threats to remove benefits if you don't tell them your circumstances have changed. But what bothers me far more is the dangerous inaccuracy of many of the statements made, and the unsupported allegations against companies, institutions (including the police) and individuals. If these allegations are true, they are dynamite. If they are false, they are also dynamite - for the Tax Justice Network.

There are four claims in the podcast:

1) that Barclays only pays around 1% corporation tax on its profits
2) that the City of London Police pursue high-profile tax evasion cases against private individuals that they have no hope of winning in order to distract attention from their failure to prosecute banks for tax evasion
3) that bankers' bonuses are a way of avoiding tax
4) that the sovereign states Ireland, Luxembourg and the Netherlands are "secrecy jurisdictions", which by concealing their tax affairs deliberately encourage companies to avoid tax legitimately due in other countries.

Let's unpick each of these in turn.

1. Barclays corporation tax payments

In 2010 there was a huge furore when the Guardian, in an muddled report, reported that Barclays had only paid tax of £113m on profits of £11.6bn, which represented 1% of its total profits. Presumably this is where Tax Justice got its figure from.

But this turns out to be not quite what it seems. Barclays' taxable profits in 2009 were actually £5.3 bn, the remainder being the AFTER TAX profit from Barclays' sale of Barclays Global Investors to Blackrock Inc. On page 103 of the 2009 report and accounts there is the following note:

"On 1st December 2009 the Group completed its sale of Barclays Global Investors to Blackrock, Inc. (Blackrock). The consideration at completion was US$ 15.2bn (£ 9.5bn), including 37.567 new Blackrock shares. This gives the Group an economic interest of 19.9% of the enlarged Blackrock group, which is accounted for as an available for sale equity investment. The profit on disposal before tax was £ 6,331m, with a tax charge of £43m, reflecting the application of UK substantial shareholdings relief in accordance with UK tax law".

In other words, Barclays claimed perfectly legitimate UK tax relief on its profit from the disposal of Barclays Global Investors, because as part of the deal it took on new share ownership in the acquiring company.

However, £113m on profits of £5.3bn is still pretty low - until you realise that these were the 2009 results, which were carrying heavy losses borne by Barclays in the 2008 financial crisis. Under UK tax law, companies that make a loss in one year are allowed to "carry forward" that loss to offset against profits in future years. This is what Barclays did in its 2009 accounts, which is why it paid so little tax in 2010. All perfectly legal and above board.

So the Guardian report is misleading, suggesting as it does that Barclays had failed to pay tax due on that asset disposal and had failed to pay the right amount of corporation tax. In fact it had paid all the tax it was liable to pay under UK tax law, which was 1% of its total profits that year including the disposal.

But this is 2012, and the podcast has only just been released - yet Tax Justice is still claiming that Barclays only pays 1% tax. Is this true? Barclays' 2011 results were released a couple of weeks ago, so I had a look at its report and accounts. The short answer is, no, it isn't true. Barclays reported profits before tax of £ 5.879 bn and paid corporation tax of £1.928 bn. This is an effective tax rate of 32.8% - considerably higher than the UK's corporation tax rate. On page 6 the Group Finance Director notes that the high tax rate is partly because the Group was forced to "impair" its holding in Blackrock, but was unable to offset that loss against tax. You could argue that the Treasury has therefore clawed back some of the tax relief that Barclays claimed in 2009!

I wondered whether the high tax rate was exceptional, so I looked at the 2010 accounts as well. These give profits before tax of £ 6bn and tax paid £ 1.5bn, an effective tax rate of 25%.

Tax Justice in their podcast imply that the percentage tax paid in 2009, an exceptional year, is the percentage tax GENERALLY paid by Barclays. They have ignored the results from the two following years in order to perpetuate a poisonous myth of large-scale tax avoidance or evasion by this company. If I were Barclays I would be considering an action against them for libel.

2. City of London police

In the podcast, the presenter starts by pointing out that the City of London Police is partly funded by banks. If the presenter means that banks DIRECTLY fund the City of London Police, I beg leave to doubt it, frankly, and I want to hear her evidence. I suspect, though, that she is referring to the fact that they are funded by their local authority, the City of London Corporation, which derives a large part of its income from banks located in the Square Mile. But that's ridiculous. We could claim that all police forces are part funded by banks - after all, banks, like all businesses, pay business rates which are distributed to all local authorities under the block grant system. That doesn't mean that banks influence the conduct of the police.

She also ignores the fact that although the police investigate crimes and recommend cases for prosecution, it is the Crown Prosecution Service (CPS) that decides whether there is sufficient evidence to proceed and puts the case together. They do get it wrong - as the Harry Redknapp case shows. But does that mean they, and the police, are corrupt? Well, according to Richard Murphy of Tax Research, it does.

When interviewed by the presenter, Richard Murphy remarked that "it strikes of, frankly, a police authority seeking to get headline news for itself to distract from the fact that it isn't prosecuting in the City of London. Harry Redknapp was found not guilty, but they didn't bring the right charge. And that has put back the whole process of tackling those who do use tax havens, because it's seen, bluntly, he got away with it."

And later on, Murphy goes on to suggest that the City of London Police is not prosecuting the right people, even though in his view there was more to the Redknapp case than came up in court. I find this a bit odd. If he thinks that Redknapp was actually doing something nefarious but was acquitted because the City of London Police didn't investigate it properly, how can he then claim that the City of London Police is not prosecuting the right people? Incompetent they may be, but a prosecution is still a prosecution.

Anyway, according to Murphy, Redknapp is actually guilty, even though the court has acquitted him. And that acquittal apparently is because the City of London Police only prosecuted him as a smokescreen, so to ensure he didn't end up in clink they brought a charge against him that they knew wouldn't stick. And the CPS are either complete dimwits or involved in the scam themselves. Blimey.

Actually, this is a very serious allegation. If true, it is corruption at the highest level in the City of London Police Force and possibly also in the Crown Prosecution Service. I hope, for their sake, that Tax Justice and Richard Murphy have evidence to support these claims. If they have, then they must - in the interests of rooting out corruption in our justice system - submit their evidence to the Justice Secretary and to the Police Independent Complaints Commission. If they have not, then they are once again in serious danger of legal action against them for libel and misrepresentation. Making unsupported allegations against the police and the legal system is unacceptable. They should either put up, or shut up.

3. Bankers' bonuses are a way of avoiding tax

I'm tempted to say "oh no, not this old chestnut again". But let's actually deal with the points made in the podcast.

Richard Murphy claims the following as evidence that bankers' bonuses avoid tax:

- Banks pay bonuses from untaxed income, which reduces their corporation tax bill. Murphy describes this variously as a "subsidy" and "tax relief". It is neither of these. It is simply an operating expense. All employee remuneration, including bonuses, is legitimate business expense and is therefore deducted from operating profits before tax. This is UK tax law as it applies to all companies, not just banks. I don't really see why there should be one tax law for banks and another law for all other companies.

- If bonuses are paid in shares, they suffer Capital Gains Tax instead of income tax, which is likely to be a lower rate (18-28% instead of 20-50%). This is true - when the shares are sold. But most bonuses paid in shares have restrictions that prevent share sale for a period time, or have embedded options which means they only "trigger" when the share price is high enough. In this way the employee takes a personal stake in the future success of the company: if the company goes bust, the employee gets nothing. And all dividends received on those shares are taxed at the employee's highest rate, probably 50%. I really can't see why this should be regarded even as tax avoidance, and it certainly isn't tax evasion.

What Murphy wants to do is distinguish bankers' bonuses (but not bonuses in other industries, including the public sector) from all other types of employee remuneration and disallow them as business expenses. This would mean that the effective tax rate on bank bonuses would be whatever tax rate the employee pays on the bonus plus corporation tax suffered. The lowest possible rate at the moment would be 25% corp tax + 18% CGT = 43% (assuming a low-paid employee and no dividend payment, which is unlikely). More likely would be 25% +28% (top rate CGT) = 53%, plus dividends at 50%. The highest effective tax rate would be on cash bonuses paid to high earners: 25% + 50% = 75%. I've assumed personal allowances don't apply because wages are high enough to absorb them. I've also ignored employees' National Insurance payments on the assumption that the earnings would be above the upper limit - but if not, then NI needs to be added to the effective tax rate as well since it is in reality a tax. All of these effective tax rates will also be inflated further by employers' NI.

Well, I suppose charging those effective tax rates would be a disincentive to pay bonuses. But boy is that steep. And it's inconsistent, particularly when the bonus is paid in shares. Why on earth should banks (but not other companies) pay corporation tax on shares they issue to employees, when they don't pay tax on any other shares they issue?

4. Ireland, Luxembourg and the Netherlands are "secrecy jurisdictions"

What Tax Justice has done here is lump together Ireland, the Netherlands, Luxembourg and the Cayman Islands, ignoring the fact that the first three are sovereign states and the other is a dependency. Sovereign states are at liberty to set their own tax rates and design their own tax regimes, and neither the UK, US nor any other country has the right to interfere with this. Ireland is under pressure from the EU to increase its tax rates because it is receiving assistance with its awful debts at the moment. But that certainly isn't true of the Netherlands or Luxembourg, both of which are models of fiscal rectitude.

In the podcast, Richard Murphy explains how Facebook uses Ireland, which charges a low tax rate of 12.5% anyway, as a conduit to channel funds out of the US into even lower tax jurisdictions such as Bermuda. Well, this may be true. BUT IT IS A SOVEREIGN STATE. If it wants to arrange its tax affairs in such a way that companies can do that, it has the right to do so. And to describe it as a "secrecy jurisdiction", implying that it is a naughty boy for failing to disclose its tax affairs for all the world to see, is nonsense. Sovereign states have the right to conceal their tax affairs from other countries. After all, tax is one of the ways in which they compete with each other to attract business. In fact the ability to charge very low corporation tax rates is virtually essential for small countries competing against much larger ones.

So the description "secrecy jurisdiction" may indeed be true - but that doesn't necessarily make the activities of either Ireland or Netherlands illegal or immoral. As both are members of the EU, if the EU were to agree on tax harmonisation they would then have to fall into line. But at the moment tax harmonisation is an AWFULLY long way off. They can do as they please.

Conclusion

In fifteen minutes of podcast Tax Justice has managed to make two possibly libellous allegations and several claims that are demonstrably false. There are a number of smaller errors and inconsistencies as well, most of which are not worth repeating here. But I must finish with this one, which is an absolute howler.....

"Shadow banking". Oh dear. No, "shadow banking" ISN'T the network of tax havens. Shadow banks are unregulated "quasi-banks" that do much the same job as banks but are not subject to the same regulation and in theory don't get the same support either. We don't really have them in the UK, but the US has lots of them, although it is bringing the largest ones such as Goldman Sachs and JP Morgan under the regulatory supervision of the FED. Shadow banks unquestionably use tax havens, but it is incorrect and misleading to conflate shadow banking with tax havens.

Tax Justice's next podcast is in a month. I await with interest to see if it is as awful as this one.

19 comments:

I've always thought of UKUncut as similar to Aberdeen Angus Steakhouses.

All Aberdeen Angus Steakhouses have to do is cook steaks. So they should be excellent at it. But for some reason they are hopeless.

UKUncut should be pretty good tax experts by now, but they are not only wholly ignorant but they don't seem to have learned a thing about tax in the last couple of years. It is bizarre.

They could have made real progress with a campaign to stop stamp duty avoidance on property purchases via offshore companies but instead they just bang on and on about Vodafone and the ancient history of Philip Green's wife's tax status.

Good points. A simpler way to make the Barclays case - because certain people might like to imply that complicated phrases like "carry forward" must be hiding some sneaky tax dodge - is to point out that the £113m was the tax on two years worth of results not one. Across 2008-09 Barclays presumably made a very small net profit (if any) and so £113m might be quite a high rate.

Having said that, the figures that I can find for Barclays in 2008 are £6bn profit (not loss) and so I'm not sure this does explain it. They did write off £8bn, so maybe that £6bn was operating profit before writeoffs, but I don't think so. I imagine they must have made much of that profit in the US and paid tax on it there. In any case it's a bit more complicated.

On the last point, I agree there is no point complaining to the UK government about the behaviour of other countries, but it is legitimate to raise a concern about tax rate competition and profit shipping. I wouldn't have thought of the Netherlands as an attractive destination for this but Luxembourg and Ireland may well be. Of course the issue is more complicated than TJN would probably admit, but worth talking about.

Leigh, thanks. I didn't look at the 2008 accounts - will do so now. Barclays themselves said the low tax rate was due to losses carried forward. I'm not sure what losses they took on the part of Lehman's business that they managed to acquire.

On further investigation it appears that the Guardian's figure of £113m can't be substantiated from the 2009 report and accounts. According to those accounts, tax paid was £1.354bn on profits of £11.6 bn. If you take out the acquisition, which as I pointed out in the post is an AFTER-TAX figure, that means an effective tax rate of 25.5%. Note 11 to the 2009 accounts gives the effective tax rate as 23.4%, but that is only tax borne on profits from continuing operations. They give the following reasons for the effective rate being below the UK corporation tax rate: non-taxable gains and income, different tax rates applied to taxable profits and losses outside the UK (I guess this would include offshore), disallowed expenditure and adjustments in respect of prior years. I REALLY want to know where the Guardian got their figures from!

Re 2008, the Lehman acquisition was originally stated as a profit in the preliminary accounts, then I think they realised they'd been sold a pup....it turned into a sizeable loss in the final accounts. Their effective tax rate in 2008 because of this was 8.8% according to the note in the 2009 accounts.

I'm going from memory here.. but my recollection is that another of the errors made by the Guardian article was in comparing UK tax paid to global profits.. so completely ignoring all the tax that was paid in other countries.

That article was probably the worst piece of financial journalism I've ever seen. And that is rather an achievement in these curious times. The worst thing is that Richie, for all his faults, knows enough to know that the reporting was awful and the 'Barclays pays 1% tax' claim is deeply misleading. He, along with many others who know this, are entirely unwilling to try and educate their audience.. they are happier with the lie.

I agree with Shinsei, above. UK Uncut could actually play a useful role in educating and informing.. but they're just encouraging ignorance, and I fail to see how that helps anyone. If there are instances where reform is desirable, having a bunch of people equipped with some actual facts would be helpful.. having them equipped with misinformation will not.

Ah, I'd forgotten about that error by the Guardian. Would that be enough to explain the discrepancy, do you think? Even using the lower figure, 23.4% down to 1% is a HUGE drop.

I'm fast reaching the conclusion that Murphy is not making errors, he is deliberately leaving figures he knows to be wrong uncorrected because they support his political stance. Which might explain why he is so rude to people who point out the errors - as in his comment on this blog, for example.

Let's be clear - redknapp was innocent on the charges made against him. The programme made that clear.

Asking why police decide to prosecute is an important part of the duty of any citizen. You seem not to know that. Unless such discussion takes place the police are not held to account. They have to be in a democracy because they do make mistakes. If they ever sued on the basis of such discussion we would have a police state. Maybe that's your aim but it's hard to reconcile with the position of your libertarian friends.

The rest of what you write is just wrong - and not worth commenting on. You can't read accounts, do not understand offshore and do not seem to realise 2008 happend. You also do not seem to understand taxing harmful behaviour is an important part of tax policy. But I guess that's the problem of being an ex banker. You may think the time for remorse is over: society does not.

Mark, I suspect the reason for that comment was the fact that I had queried the figures. If I can't read accounts then my comments aren't credible, are they? But this blog has been read by at least six other experienced accountants to my certain knowledge and none of them have complained about my figures.

>> - If bonuses are paid in shares, they suffer Capital Gains Tax instead of income tax, which is likely to be a lower rate (18-28% instead of 20-50%). This is true - when the shares are sold... <<

This is not true. Bonuses paid in shares are subject to income tax at the time they vest (which is usually one, two, or three years after the award date). They are subject to capital gains tax on any gains after the vesting date.

Paul, thank you for a very clear answer to something I wondered about but had been too lazy to look up. I have a slightly off-topic query.

I have heard a lot of fuss about how private equity uses "carried interest" to turn what is really employees' income/bonuses that would be taxed at 40/50% into capital gains that are lower taxed. Is this really a bit of a (legal) dodge or are these guys actually putting their own money, from taxed income, into the underlying investments, along with outside money?

May be a US issue (see Buffett/Romney) but I remember John Moulton saying something similar to Buffett.

Feel free to ignore, particularly if private equity is not really your area.

Banks funding City of London Police? Normally a reference to the DCPCU (Dedicated Cheque and Plastic Card fraud Unit). Which is 50% funded by the banks and 50% by the Police Authority and often has bank staff seconded to it. Note that these are rarely investigating large scale bank fraud - simply because cheques and plastic aren't particularly efficient vehicles for such.

As for Luke's private equity question - it's more complicated. If you own shares in the business you are part of, you get special CGT treatment. It used to be "taper relief" - which meant (approximately) a 50% cut in CGT liability if you held the shares for a year and if you held them for 2 years, a 75% relief - hence, at the time, the 10% CGT statements. This has been replaced by "Entrepreneurs' Relief" which restricts it to a narrow class of employee (you need to be a partner or an officer and more than 5% shareholder) and restricts qualifying gains to a "lifetime limit" - currently £5m.

Paul is also slightly incorrect on the taxation of share bonuses. If the "Corporate Share Ownership Scheme" which holds the shares is HMRC approved (the ones for the very high paid employees may well not be) you can take the shares out after 3 or more years, free of income tax.

SE: there's a "Company Share Option Scheme", which awards share options. Or a "Share Incentive Plan", which awards shares free of all tax. Neither is relevant to bankers' bonuses in the sense we're discussing.

Luke: It's common for hedgies (and private equity guys) to keep their own money in the funds they manage. But the Carried Interest treatment applies equally to management fees they receive proportional to fund performance. I see no justification for this, and I don't know why HMRC agreed to it: it seems not to be required by law.

AFAIK share incentive plans are only free of all taxes if they were either part of an SAYE scheme or a share options scheme where the options had to be current for 3 years. I had both some years ago but things may have changed

RM: << Asking why police decide to prosecute is an important part of the duty of any citizen.>> The police don't make the decision to prosecute; the Crown Prosecution Service does. You seem not to know that.

About Me

In a past life I worked for banks...now I write about them. Actually I write about finance and economics generally. And about anything else that interests me - so you may occasionally find posts on this site that have nothing to do with banking, economics or finance. In fact they might have something to do with music, since I'm a Associate of the Royal College of Music and a professional singer and teacher. I'm also an alumnus of Cass Business School, where I did an MBA with a specialism in finance and risk management.
I'm very happy to accept comments on my posts, but if you have questions about something I've written that you don't want to discuss in the comments, do please email me at francesmcoppola@gmail.com.
My professional blog as singer and teacher can be found at singingiseasy.blogspot.com.